Letter to Minister for Finance - TI Ireland concerned new EU legislation does not adequately address conflicts of interest in financial supervision.

We are writing to express our concern that new EU legislation aimed at transferring supervisory powers to the European Central Bank (ECB) does not adequately address the issue of conflicts of interest in financial supervision.

The interaction of officials with the businesses they regulate poses real and potential conflicts of interest in the public service. In particular, one of the primary concerns that Transparency International (TI) has highlighted in its research relates to the ‘revolving door’ that allows individuals to move freely from positions of public office to the private sector.[1]

The exchange of knowledge and expertise between the public and private sector can improve effectiveness in policy making and public service delivery. However, the revolving door brings risks that government officials will be influenced in their policy decisions by the interests of prospective employers. Once officials have moved to the commercial sector, they may also be tempted to use former contacts and privileged information for the benefit of their new employers.

The risks associated with conflicts of interest are particularly acute in financial supervision. Given the close relationship between supervisors and the institutions they supervise, and the large degree of mobility between the two sectors, it is important that the necessary checks and balances are in place to prevent regulatory capture and a repeat of the most recent financial crisis.

Strong measures are required to manage potential conflicts of interest in this area. TI is therefore supporting a mandatory ‘cooling off’ period which would prohibit senior supervisors from taking paid work in the institutions they supervise for a period of two years.

The framework for managing conflicts of interest at the ECB does not adequately address the issue of the revolving door.[2]We were disappointed, therefore, to find that the legislative proposal published by the European Commission in September 2012 to establish a European-level supervisory body does not advance beyond the current framework. The European Parliament has proposed an amendment that would impose a two year ‘cooling off’ period for ECB staff, a proposal that is in line with current practice in prudential supervisory authorities in many EU member states.

The proposed transfer of supervisory powers to the ECB should aim to remedy some of the defects of the old system. This means embedding high standards of integrity, accountability and transparency from the very outset. However, the position of both the Irish Government and the EU Council on this matter is unclear. We are therefore asking you to publicly state your support for mandatory ‘cooling off’ periods to help ensure that the supervision of the European banking system is free from conflicts of interest.

Yours sincerely,

John Devitt

Chief Executive

Cc: Ambassador Rory Montgomery, Permanent Representation of Ireland to the European Union; Mr Michael Taggart, Attaché, Permanent Representation of Ireland to the European Union